Why Is My Credit Score Low After Getting a Credit Card?
Credit is a tricky thing. We all know it is essential to have good credit, but we do not always seem to know how to make it happen. Complicating matters is the fact that there are some things impacting your credit that you may not be able to control. Or better said, there are things of which you are not completely aware that impact your credit.
In the article, we are going to take a deep dive into credit cards and credit and explain why a new credit card impacts your credit negatively.
Why a New Credit Card Impacts My Credit?
You may have heard that proper use of a credit card can improve your credit. That is true, and we will explain more further down about that. First, let us answer your question, why is my credit score low after getting a credit card?
Any time you open a new line of credit, no matter if it is a credit card or a loan, it is a hard inquiry on your credit report. This always causes it to go down by a few points.
If you have excellent credit, a small drop may not matter. If you have fair or bad credit, these few points matter.
The reason this happens is that if you open up several credit cards or loan applications at one time, it could be a sign of risky behavior. It could be a sign that you have too much debt and cannot pay it all back. It is an indication to creditors to be aware. If you are carrying a large amount of debt, especially as it compares to your income, that causes your credit score to drop.
How a Credit Card Improves Your Credit?
Do not despair too much. When you have a credit card, it can also help your credit. It just may not help it immediately. First, you have to show that you are making good choices and using your credit wisely. This takes a little bit of time. A percentage of your credit score is based on your credit utilization. This is how much you use of the credit you have. Lenders prefer that you are using only about 30 percent of your credit. If you can keep your credit utilization before that percentage, it can help increase your credit score.
It is easier to use numbers to explain this, so here is a real world example.
You have a credit card with a $10,000 credit limit. Thirty percent of that is $3,000. If your balance due amount is less than $3,000, you are using less than 30 percent of your allowable credit, and your credit utilization is also below 30 percent. Anything over $3,000 is over the 30 percent line.
Other Impacts on Your Credit
Credit utilization is not the only impact on your credit score. It is important to know what affects credit score. If you have high balances on your credit cards, it is going to impact your credit score negatively.
While it is important that you make your payments on time and in the right amount, it is equally important to keep your credit utilization below 30 percent.
You can spend more than 30 percent of the available credit on your credit card, but you must pay it off when your bill is due.
There could be missed or late payments sitting on your credit report. While one of these will go away over time, if it is a recurring problem, it could have devastating implications for your credit score. If you have been a victim of identity theft, it will impact your credit score. You want to make sure you monitor your credit report for items such as this.
Credit Score Explained
Now let’s cover some basics. it is important that you understand what a credit score is. Your credit score is a three digit number that lenders use to determine how risky it is to lend you money. It goes without saying that when a lender loans you money, they need to have some security that you are going to repay that money on time. Your credit score helps them determine that.
The higher your credit score is, the less of a risk you are for the lender.
Conversely, the lower your score usually tells the lender that you pose some or a large amount of risk. Your credit score is based on many different factors. These factors include your payment history, includes items such as late or missed payments, the amount of debt you currently have, and your debt to income ratio.
How Credit Works
You need good credit to qualify for credit. You need to have credit to be able to get loans and credit cards, which can improve your credit score or hurt it. When you have bad credit, you may not get loans or credit cards. When you miss payments or make them late, they decrease your credit score. When you have a lot of debt, especially compared to your income, it decreases your credit score. However, when you have a loan or a credit card, and you make payments on time, you can improve your credit score. When you use your credit cards and pay them off every month, this can improve your credit score.
If you do qualify for loans with bad credit, they may come with high interest rates. Interest is what the lender charges you for allowing you to borrow from them. The interest rate is depending on your credit score. The higher the interest rate you have, the more money you ultimately are paying. Let me show you a real example of how bad credit impacts interest and your repayment amount.
With good credit, you may get a loan with 5 percent interest:
If you borrow $10,000 and you have 5 percent interest, and you must pay it back in 36 months, this is what your monthly payments look like:
$10,000 + $500 (interest) = $10,500
$15,000 divided by 36 = $291.67 monthly payment.
With bad credit, you may find a loan with 15 percent interest. This is what that looks like:
$10,000 + $1,500 = $11,500
$11,500 divided by 36 = $319.44
Your payment increases by about $28 per month, which adds up to $1008 over the course of 36 months.
Pull Your Credit Report
While monitoring your credit may seem like a lot of work, it is important work. You can request a free copy of your credit report once a year. You should obtain it and review it. You want to look for anything that does not seem right or is just plain wrong. In some cases, items that were legitimate just did not come off your report timely. In other cases, there could be incorrect information on your credit report, which negatively impacts your credit score. If you see something that is wrong on your credit report, you should contact the specific credit bureau to correct it.
Ways to Improve Credit
It is possible make improvements to your credit score. However, it takes time and effort on your part. Depending on how bad your credit score is, it may take a significant amount of time for you to correct it.
Pay on Time
The first step you should take is to make sure you make all of your payments in the correct amount on time. This is one of the best and easiest ways to begin to fix your credit.
Eliminate Debt
The other way to help repair your credit is to reduce your debt. You want to create a focused plan to help you reduce and eliminate as much debt as possible. While it may not be practical to have zero debt, there is probably a good amount you can eliminate.
More Help
When you are serious about improving your credit score, you may need some assistance to get there. Unfortunately, we are not always aware of the best financial decisions we can make. The Goalry Mall is here to help you. We have many resources available that can help you get your credit score back on track. It does not matter if you want to do a credit score check or simply start understanding your credit score; we are here for you.
No matter where you are on your credit improvement journey, we can help you. We can help you pull your credit report from all three credit bureaus. We can help you navigate the proper steps to take when you need to correct something on your credit report. No matter what you need, Goalry is here.
Reach Your Financial Goals with the Creditry Store.
Conclusion
It is probably obvious to you that the best way to care for your credit is not to let your credit score drop. But, sometimes things happen, and you have to make decisions that may negatively impact your credit. The best you can do is be educated about how your credit score is impacted and what causes it to increase or dip. When you begin to understand how your credit score works, you are in a better position to take care of it.